Nationalisation: a business case for failure

Gushwell Brooks

Gushwell Brooks

Gushwell F. Brooks is an LLB graduate from the University of the Witwatersrand. He did not go on to become an attorney, but much rather entered the corporate rat race. After slaving away for years, he found his new life as a talk show host for Talk Radio 702 and 567 Cape Talk.

24 Oct 2012 11:31 (South Africa)

Emotive speeches and impassioned arguments alike may call for the nationalisation of mines, but it’s not accurate to assume that the state can turn around working conditions for miners. As far as the business case for nationalisation goes, we need to maintain a more rational outlook.

For the past few weeks, a question has been pestering me with all the perseverance of a little demon on my shoulder. It’s a simple question, but not so simple to answer: is there a business case for nationalisation?

One would think this query would have been explored far more widely than it has, given that The Champion of the Poor, the Great Man who Wishes to Nationalise, has managed to convince a large portion of our population that the only road to “economic freedom in our lifetime” is through the nationalisation of key, strategic industries in South Africa.

So let’s assume for a second that his argument is solid. I know it’s hard to imagine, but let’s try. And alongside, let’s look at the facts – the curent track record with SOEs. For example Telkom, the SABC, Eskom and SAA.

Let’s take the state-owned airline carrier first, since it is the most obvious and recent example, and since it lends itself to a critical dissection.

SAA has hired and fired four CEOs within the last 11 years; it is estimated to have haemorrhaged R16 billion in losses since 1997, and now it has whipped out that good old begging bowl for a R5-billion bailout. The bailout, interestingly enough, was granted as soon as an entire board, chaired by Cheryl Carolus, resigned after complaining about not receiving support from the shareholder, namely the state.

So whilst SAA fails to deliver a profit in an industry that arguably struggles to yield multitudinous profits, Velvet Sky comes to mind; some of her competitors globally and locally manage to eke out a profit.

Funny, that.

Eskom can take centre stage for a whole different reason. Not for its failure to produce profits, but much rather for the poor management, planning and strategy it displays.

The Medupi and Kusile power stations, regarded as some of the largest coal-burning power stations in the world, are being built to solve South Africa’s current electricity shortfall. Remember 2008, when we went through a series of rolling blackouts referred to as load shedding? Now, four years later, when the lights go out in various communities across the nation, load shedding isn’t blamed any longer. Rather, the blackouts are attributed to “much-needed service and maintenance of substations”. This mess, as admitted by former president Thabo Mbeki, is due to government’s declining budget requests by the electricity provider for the building of further power stations.

Of course, there is also the deal signed between BHP Billiton and Eskom. Opposition parties have pounced on the ruling party’s back like a pride of lions trying to drag down an ailing buffalo. Whereas you and I are expected to pay R1.20 per kW, the large enterprise is only expected to pay between R0.08 and R 0.10 per kW. This deal was, of course, struck so that BHP Billiton’s electricity spend could be linked to the price of aluminium. A cunning plan if the price of aluminium competes with that of gold or platinum, but not such a swell idea when the metal’s price is at an all-time low.

Next up, let’s take the SABC. That paragon of quality entertainment and information, renowned for its stable management and supported by the Joe and Jane Public on a nominal, annual licencing fee of R250.00, unfortunately fails to impress as well. The picture is bleak: estimated losses of R129 million and R500 million in 2011 and 2010 respectively, owing to financial mismanagement; having to cut 350 members of staff this year; continued allegations by current and former staffers that they never received their salaries on time.

Who else is there? Ah, Telkom, holder of the fixed line, telecommunication monopoly of South Africa. It is not entirely state-owned, but the state still has a huge stake in it – about 39%. So although more than 60% of its shares should sit in private hands, it has a monopoly over fixed line telecommunications. And, more importantly for the purposes of this discussion, its share price is just shy of R19.00 at the moment. It was R40.00 in April last year.

Unfortunately, the only common denominator in this list of spectacular failures is state ownership.

And why does it fail? One can only guess. But possibilities spring to mind such as poor planning, cadre deployment or government failing to do the one thing mastered by private enterprises: focus on turning a profit.

Certainly not every enterprise that government dips into is meant to yield a profit. Some enterprises will require the continued support of our tax pool, as the fundamental focus is the provision of a service otherwise inaccessible to the masses. So I am not arguing for the wholesale privatisation of all entities and services throughout the nation. But for goodness’ sake, let’s maintain some perspective – and hold those entities who can be expected to yield positive financial results to a higher standard.

SAA’s comparable prices, when matched with those of some of their privatised and profitable international and local competitors, makes me wonder why my taxes – taxes that should go toward schools, hospitals and housing for fellow South Africans that cannot afford such privileges themselves – are being diverted towards bailing out ailing industries or paying the salaries of incompetent leaders.

All the examples I listed barring Eskom have privatised competitors that are yielding profits, penetrating lower income markets and growing substantially. The difference between these private corporations and SOEs is that management teams are held to account. If you fail to yield growth results, profits and generally expand the wallets of shareholders – well, sorry, buddy; you’re fired.

So people with the requisite know-how and experience are placed into these positions and they apply business models that navigate the complex South African market and exploits profits out of it.

Prevailing trends amongst SOEs suggest that if government were to nationalise mines and banks, entities that are already under severe pressure – but somehow keep their heads above water – could go south very quickly.

Ever since the death and injury of 112 casualties at Marikana on the 16th August 2012, South Africa’s mining industry has faced a substantial revolt – both amongst its workers and within a global financial community that has become skittish over investment prospects. Which means we have to tread carefully. Mining bosses may have treated their workers unfairly, but it will not help to throw the baby out with the bathwater: we have to retain the accountants and managers that have managed to keep their mines operational and financially worthwhile.

Can government really achieve the same from a business perspective?

I think not, so for now I am pleased that influential people like Susan Shabangu wish to steer clear of nationalising the mines. Mining in this country needs a serious overhaul, certainly – workers need to be paid sufficiently and mines need to invest in the communities that surround them.

But will the government really do this any better? Is there any guarantee that nationalised mines will be less corrupt? As it is, government is largely failing to protect the rights of mineworkers through appropriate regulation enforcement.

Mines need to turn a profit from the rock they drill into for the extraction of precious minerals and metals. On the other side, government needs to collect the taxes due and enforce the responsibilities that accompany the mine’s rights to sell off their booty.

We do not need nationalisation – which has, thus far, failed to yield anything but the dumping of taxes into broken enterprises. DM

Gushwell F. Brooks is an LLB graduate from the University of the Witwatersrand. He did not go on to become an attorney, but much rather entered the corporate rat race. After slaving away for years, he found his new life as a talk show host for Talk Radio 702 and 567 Cape Talk.

Gushwell F. Brooks is an LLB graduate from the University of the Witwatersrand. He did not go on to become an attorney, but much rather entered the corporate rat race. After slaving away for years, he found his new life as a talk show host for Talk Radio 702 and 567 Cape Talk.

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